Lecture 20 Fiscal Policy IIDemand Side Fiscal Policy-Keynesian roots-CountercyclicalCritiques of Keynesian Fiscal Policy-Lags-Crowding-outSupply Side Fiscal Policy-Examples -Tax rates and tax revenues-1980s experimentDemand Side Fiscal PolicyCountercyclical: smooth out the business cycleLags:recognitionimplementation (pass both houses of congress and get president to agree)impaction (stimulus, gov policy to actually work through the economy)Keynesian answerautomatic stabilizersA Progressive income taxesB Corporate profit taxesC Unemployment insuranceD Welfare paymentsAB change T CD Change GCrowding outGovernment spending crowds out private spendingG increase c, I decrease2012: Balanced budget2013 G increase by $100 billion: no new taxesRD1DS, I2012 2013s=200 250i=200 150net changesG+100I-50Does Keynesian Fiscal Policy work?Answer:Much debate among economistsLittle debate among politiciansSupply Side Fiscal PolicyDemand vs SupplySpending ProducingSupply Side: Sample ProposalsTax credits for research and developmentEducation subsidiesLower corporate profit taxesLower marginal tax ratesTax Rates and tax revenueThe math:Income tax revenueLaffer curve:Incentives affect behavior: higher tax rate reduces incentives for productionTax rates and Tax Revenue1980s experimentAll tax rates fell: total revenue felltop 1 percent paid 40 percent of
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